In a partnership, you must take risk to reap reward: Virc

A recent Ontario Court of Appeal judgment is an instructive tutorial on the difference between limited and general partnerships, says Toronto civil litigator Patricia Virc.

“If you want to limit your exposure, you can’t expect an unlimited reward unless you specifically contract for it,” says Virc, a lawyer with Steinberg Title Hope & Israel LLP

The case involved a Canadian publisher, the sole general partner, and the estate of its sole limited partner. According to court documents, the partnership was dissolved after the limited partner’s death, and a lower court awarded his estate a 50 per cent share of the residual assets of the partnership.

The judgment notes the application judge found that while the Limited Partnerships Act (LPA), provided for the distribution of capital contributions and profits on dissolution of a limited partnership, it was silent with respect to the distribution of the residual assets.

“The application judge found that there was a gap in the LPA,” Virc tells AdvocateDaily.com, “so he turned to the Partnerships Act to fill the gap since that Act is applicable to all partnerships, including limited partnerships.”

The application judge referred to s. 44 of the Act, the judgment notes, which states “the ultimate residue, if any, is to be divided among the partners in the proportion in which profits are divisible.”

The publishing company appealed that decision, with the appeal court ruling in its favour.

“I felt that appeal court Justice Ian V.B. Nordheimer’s reasons were so clear and so illuminating,” says Virc. “Basically what he said is that under the LPA, limited partners can’t have their cake and eat it too.”

In overturning the lower court’s decision, the appeal court said there is no gap in the LPA.

“On a plain reading of the LPA, a limited partner has very strict and defined rights and obligations,” the judgment reads. “Those defined rights and obligations do not include the right to participate in the residual value of the partnership on dissolution. Had it been the intent of the Legislature to accord that right to limited partners, presumably the LPA would have so provided.”

“The general partner takes all the risk, so they’re entitled to the residual reward,” says Virc. “If limited partners want the advantages of participation in the residual, they would have to contract for that through the limited partnership agreement, but that didn’t happen in this case.”

When people enter into a limited partnership, Virc says they choose that route as a way to protect themselves from exposure.

“They have to give something up for that protection,” she says, “and in this case, what was given up was a share of residual assets.”

Upon dissolution of the partnership, Virc says limited partners get back their contribution and their percentage of the profits, and that’s it.

“You can’t protect yourself from the downside and liability, and still expect to reap the benefits,” she says. “Justice Nordheimer made it seem brilliantly obvious that you can’t have the reward unless you take the risk.”

Virc says courts always strive for fairness, and this decision is a textbook lesson in the differences between general and limited partnerships.

“This decision is a great example for law students,” she says, “and for the general public.”